Sex offender treatment courses are being cut back and preparations are being made to reopen a disused army barracks near Dover in Kent to cope with the growing cash and overcrowding crisis in the prison and probation services, the Guardian has learned.

The reduction in programmes treating sex offenders and tackling domestic violence has been ordered as a result of a financial squeeze in the probation service.

At the same time, ministers face an increasingly difficult problem in how to cope with the rapidly rising prison population, which hit 79,145 last Friday, leaving only 800 spare places in the system.

Prison service managers expect "crunch point" to arrive in the next six weeks. Contingency plans are believed to include plans to reopen a disused army camp, near Dover, which could house up to 500 low security category D prisoners. Also under consideration is the conversion of a "discrete wing" at Ashworth top security mental hospital on Merseyside to provide 300 more places.

Napo, the probation officers' union, claims the "crisis" is so serious that the home secretary, John Reid, this month ordered an "urgent and fundamental review" of the new national offender management service (Noms), which runs prisons and probation services in England and Wales. The review by consultants is looking at whether Noms should continue in its current form and is expected to be completed within the next three weeks.

It is believed Noms is facing a deficit of £40m for the first half of this financial year on top of the government's decision to freeze the Home Office budget for this and the next two years. Financial planning has been disrupted by delays in fixing probation area budgets which are normally set in November each year but were not finalised in May this year.

The London probation service has been particularly badly hit and is thought to have a half-year deficit of £10m. An internal memo dated August 24 reveals that offender programmes, including those for sex offenders at weekends and in the evenings, are being curtailed, with experienced staff being switched into supervision work.

The memo said: "Since the beginning of this financial year it has become apparent that London Probation as a whole does not have sufficient funds to maintain current staffing levels in interventions whilst covering vacant probation officer posts in offender management with expensive agency staff. It is therefore necessary to identify appropriate PO [probation officer] qualified staff in interventions and move them to offender management as quickly as possible."

In response, London probation staff warn in an email that the public could be put at risk by switching experienced staff from sex offender treatment and domestic violence programmes. "This will compromise the public's safety by having men who sexually offend either not being on programmes, or being treated by inexperienced staff without appropriate treatment management," warned one manager.

Harry Fletcher, of Napo, claimed Noms has been in trouble since it was set up; ministers needed to examine alternative approaches based on partnership rather than privatisation. "All Noms has done is to create additional levels of bureaucracy without any increase in frontline staff. There are already 1,600 people working in Noms headquarters. The money would have been better spent on recruiting, training and retaining additional probation and prison staff."

But a Home Office spokesperson strongly denied Noms was in trouble: "There is no crisis; only last month the prospectus outlining our vision for the future of Noms was published." She said the claim that Dr Reid had ordered a "fundamental review of Noms" was "nonsense" but confirmed that its budget deficit was being looked at. As for contingency plans to cope with rising prison numbers, the Home Office said "all options are being kept under review".

The disclosures came as prison officers voted yesterday to call a national strike over pay for this Friday. Colin Moses, of the Prison Officers' Association, said the decision had been triggered by a prison service legal injunction to ensure staff worked extra hours in duties such as suicide watches.